Three judgments recently published by the National Court can trigger off a positive impact in the commercial operations between Spain and Denmark, as well as other EU countries that bear withholdings taxes in Spain on certain services.
According to Spanish legislation, companies resident in the EU carrying out businesses in Spain without a permanent establishment can be taxed in Spain on the net income obtained, at the tax rate of 19%. The taxable base is the amount resulting from reducing the income obtained in Spain with the expenses directly related, even if these are incurred outside Spain.
However, Spanish legislation establishes a withholding tax obligation on the payer, meaning that, when Spanish companies proceed to make payments to non-resident companies for services taxable in Spain, they must apply a withholding tax on the gross amount paid, without discounting any expenses. This means in many cases that the withholding applied by the payer is higher than the final tax due in Spain or even higher than the real net profit that the non-resident company is obtaining for its activity in Spain.
In those cases in which the withholding tax applied exceeds the final tax due, the law establishes that non-residents may submit a self-assessment requesting the refund of the amount paid in excess. The submission of this self-assessment usually entails a detailed review by the Spanish Administration of the directly related income and expenses. On many occasions, the verification of the Administration ends in significant adjustments of the expenses when considering them as not related to income or not sufficiently accredited as such.
This means in practice that most non-resident companies assume this withholding tax as a final cost. This criterion is absolutely inefficient and makes foreign companies less competitive, generating that Spanish companies have to pay a higher amount to these foreign suppliers in order to meet the tax or financial cost borne by these companies in our country.
Although most of the agreements signed by Spain with EU countries significantly reduce these costs through the exemption or through reduced withholding rates under tax treaties, there are particularly harmful cases such as Danish companies wishing to operate in Spain because the Tax Treaty between Spain and Denmark is on hold. Therefore, Danish companies have been bearing a withholding of 19% on all payments made from Spain if they are linked to an economic activity in our country in the past.
In 2021, the European Commission formally communicated to Spain that said regulation was contrary to European Union Law, however, the Spanish Government has not proceeded to modify the local regulations. Despite this, the Audiencia Nacional has concluded that Spanish legislation is illegal and that, when determining the basis on which the withholding tax is applied, the payer must take into account the expenses that would be deductible, that is, that the withholding will not be applicable on the gross amount but on the net profit, provided that it is proven that the expenses are directly related to the income obtained in Spain.
This fact is especially relevant for companies that habitually make payments abroad subject to withholding. In many cases, the company receiving the funds will not want to share with the payer what its real profits are derived from the commercial operations but this criterion may be especially interesting in operations carried out within a commercial group or in franchise structures where that information can be shared with the payers with the aim of reducing the amount to be withheld.
Without prejudice to the fact that the Spanish Administration will continue to check whether or not the expenses considered to reduce the tax base are directly related to the activity in Spain, we understand that these judgments will force the Spanish legislator to assess whether it is necessary to modify the internal regulations and, of course, open a new opportunity to European companies that had been suffering unduly these withholdings.
